Congress Must Not Ignore the Medicare Trustees' Warning

Congress Must Not Ignore the Medicare Trustees' Warning

Congress needs to get serious about Medicare reform. On March
25, the Medicare Trustees[1] issued a Medicare funding warning that
triggers presidential and congressional action to reduce Medicare's
excessive dependence on general revenues as part of its overall
financing. [2] Congress enacted the Medicare "trigger" to
call congressional and public attention to the enormous financial
challenge the Medicare program faces. As the baby-boomer generation
starts retiring and health costs continue to escalate, the Medicare
Trustees urge decisive congressional action:

The longer action is delayed, the greater the required
adjustments [will be], the larger the burden on future generations,
and the more severe the detrimental economic impact on our
nation.[3]

The President introduced his Medicare proposal last month in
response to the 2007 Medicare funding warning, and the next
President will have to propose legislation yet again in 2009. But
Congress does not have to play politics with the Medicare program
or wait for presidential action. It can take steps this year to
transform Medicare from a costly open-ended entitlement program to
a defined-contribution program that would maximize cost control and
limit taxpayers' exposure to massive tax increases.

The 2008 Trustees Report

The 2008 Medicare Trustees Report notes that Medicare
expenditures in 2007 were $432 billion, or 3.2 percent of gross
domestic product (GDP).[4] Over the next 75 years--the time frame for
long term actuarial projections--these expenditures are scheduled
to rise rapidly, partially in response to an acceleration of baby
boomer retirements, amounting to almost 11 percent of GDP.[5] The
trustees also estimate that Medicare's long-term unfunded
obligation--the benefits promised but unpaid for--will amount to
more than $36 trillion, or roughly two-and-a-half times the size of
the entire U.S. economy.[6] In other words, every American household's
share of Medicare's unfunded obligation is like a $320,000 IOU.[7]

Medicare Part A--the Hospital Insurance (HI) Trust Fund, or the
part of Medicare that pays hospital bills--accounts for $12.4
trillion of Medicare's unfunded obligation.[8] The HI Trust Fund is
already spending more in benefits than it gets in revenues. The
trustees project that Part A will grow by 7.4 percent on average
over the next 10 years and that the HI fund will be insolvent by
2019.[9]

Medicare Parts B and D contribute $15.7 trillion and $7.9
trillion, respectively, to Medicare's unfunded obligation. [10]
These programs, grouped under the Supplementary Medical Insurance
(SMI) Trust Fund, will never become "insolvent." The reason: The
government automatically pays the medical bills for these programs
each year, drawing down general revenues from the Treasury to cover
three-quarters of whatever costs these programs incur. But, as the
Trustees note, the SMI portion of Medicare will increasingly
require a significantly larger amount of general revenues to
finance the open-ended demand for medical benefits.

The trustees report that the cost growth of Part B, averaging
9.6 percent during the past five years,[11] is likely to be even
higher than current-law projections because estimates do not
include the substantial yearly "fix" that Congress routinely makes
to stave off the negative consequences of their own Medicare
payment system for doctors. Without this annual "fix," and given
Congress's stubborn refusal to reform the Medicare physician
payment system in any meaningful way, doctors would face massive
payment cuts that could jeopardize senior access to physicians'
services.[21]

Unlike Medicare Parts A and B, costs for Part D have been lower
than projected, largely because of the positive consequences of the
intense competition of the consumer-driven delivery of prescription
drugs. Nonetheless, Part D costs are still estimated to increase by
11.1 percent through 2017.[13]

Another Medicare Funding Warning

Under the Medicare Modernization Act of 2003 (PL 108-173),
Congress enacted a Medicare funding warning. This is a legal
mechanism that triggers action by the White House and Congress to
address Medicare's large and growing unfunded obligations. If more
than 45 percent of Medicare's total costs are projected to come
from general revenues as opposed to dedicated revenues (such as
payroll taxes and beneficiary premiums) within seven years, then
the trustees must make a determination that the program is relying
excessively on general revenues. Two consecutive determinations
trigger a Medicare funding warning.

In their 2007 report,[14] the Medicare trustees issued their
funding warning and thus triggered a presidential submission of
remedial legislation for 2008.[15]

With this year's report, the Medicare trigger has been pulled
for the second time. As required by law, the next President will
have to submit legislation to Congress within 15 days of the next
presidential budget for expedited consideration in Congress. But
Congress should act now: The cost of continued congressional
inaction over the next year would, in effect, add approximately $2
trillion to Medicare's already enormous unfunded obligation, thus
imposing even greater financial burdens on young working
families.[16]

What Congress Should Do

Congress should start getting serious about facing the country's
largest fiscal challenge. It can pursue two broad policy objectives
that would make short-term changes in the existing Medicare program
compatible with long-term reform while putting into place major
structural changes that would accommodate the retirement of the
massive baby-boomer generation beginning in 2011. Specifically,
Congress should do the following:

Make short-term changes compatible with future reform.
This could include applying existing Part B rules for
income-related subsidies to Part D, raising the enrollees' share of
Part B premiums from 25 percent to 30 percent, restructuring
Medicare and Medigap cost-sharing, and establishing a modest
co-payment for home health benefits.[17] Congress may also want to
consider phasing in a higher age of eligibility for Medicare
benefits.

Move toward restructuring the Medicare program for the
baby-boomer generation. The Medicare program should remain as
it is today for current beneficiaries. But, at a certain date,
Medicare should be transformed into a defined-contribution system,
in which the government contribution for benefits is adjusted for
age, income, or health status. In any case, the government
contribution should be based on a real market calculation of the
price of medical goods and services but capped at a dollar amount
each year, just as it is today in the popular and successful
Federal Employees Health Benefits Program (FEHBP). While there are
a variety of models for such a system, a defined-contribution
arrangement would make Medicare costs predictable for seniors and
taxpayers alike.

Conclusion

The rapid growth in the cost of federal entitlements is perhaps
the single largest domestic policy challenge facing Congress.
Whether or not Congress wants to face it, Medicare reform is the
most important entitlement policy issue. The costs and consequences
of a failure to act in a timely fashion are enormous.

Greg D'Angelo is a Policy Analyst in
and Robert E. Moffit, Ph.D., is Director of the Center for Health
Policy Studies at The Heritage Foundation.

[15]The legislation is entitled the "Medicare
Funding Warning Response Act of 2008." It has been introduced in
the House and Senate as companion bills H.R. 5480 and S. 2662. For
a brief description of the act, see www.hhs.gov/asl/medicarefundingwarningsummary.pdf
.

[16]2008 Annual Report of The Boards of
Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, and authors'
calculations.

[17]For a more detailed description of these
options, see Robert E. Moffit, Ph.D., "Make Medicare Budget Options
Compatible with Comprehensive Reform," Heritage Foundation
WebMemo #1807, February 11, 2008, at www.heritage.org/Research/Budget/wm1807.cfm.